For Canadian retirees, passive income generated from CPP or OAS pensions may not be enough to meet the ever-increasing costs of living.
While you could, in theory, retire in a smaller, lesser-known Canadian city if you’re willing to live a life of frugality, I’m sure you’d agree that most retirees aren’t willing to settle for a retirement that’s anything short of care-free and comfortable. You’ve worked hard to accumulate enough wealth to build up a sizable retirement nest egg, and you deserve to enjoy your retirement and not have to worry about pinching pennies to avoid what many retirees fear most: running out of money amid retirement.
Sure, life expectancy is increasing alongside health costs. But there are ways to get the passive income you need without eroding your nest egg by spending the principal that your CPP or OAS pension payments aren’t able to cover. Following the February-March sell-off, there are ample dividend (or distribution) paying securities that sport higher (sustainable) yields that are trading at a fraction of the price. And as the COVID-19 crisis looks to abate in 2021, such battered REITs are also capable of appreciating at a quicker rate than they would have under normalized conditions.
This piece will have a closer look at two battered REITs within real estate sub-industries that have been hit hardest by this crisis. We’re talking office and retail REITs, both of which are heavily out of favour but offer considerable upside and sustainable high yields that pensioners may wish to consider investing in with a portion of their nest eggs.
This piece will focus on two retail impacted, but relatively resilient REITs: CT REIT (TSX:CRT.UN) and SmartCentres REIT (TSX:SRU.UN), the latter of which I own shares of in my portfolio. Both names, I believe, are considerably undervalued and can allow certain investors to have their cake (high-yielding distribution) and the ability to eat it too (outsized gains in a potential upside correction coming out of this pandemic).
CT REIT is the REIT that houses a majority of Canadian Tire’s locations. The warehouse- and retail-focused REIT has faced a minimal amount of cash flow disruption relative to most other REITs out there, and with rent collection creeping back to normalized levels, I’d look to back up the truck on shares today while they sport a yield near the 6% mark.
In prior pieces, I’d noted that CT REIT was a savvy way for income investors to ride on the coattails of a ridiculously liquid (and financially flexible) retailer in Canadian Tire. Even if you’re expecting the COVID-19 crisis to worsen, CT REIT is unlikely to take its distribution to the chopping block, as its top tenant, Canadian Tire, has demonstrated far greater resilience than most expected during the worst of the crisis.
With CRT.UN shares down just over 17% from pre-pandemic levels; the REIT may not be the most compelling bargain out there. But if you seek a safe payout and are wary over a worsening of this crisis, CRT.UN is a prudent source of income for those seeking to add to their CPP or OAS pension payments.
For those willing to take on a bit more risk for a lot more upside, SmartCentres REIT may be the horse to bet on. Shares are currently off 37% and 46% from their 52-week highs and 2016 all-time highs, respectively. The retail-centric REIT behind major SmartCentres shopping centres has been taking on a brunt of the damage amid this crisis, as consumers have flocked to online retailers to get their goods and services.
While brick-and-mortar retail is facing one of the biggest road bumps in its history, I think that we’ll see a massive reversion in mean demand for retail real estate once this pandemic passes. Many retailers will stand to go belly up, and retail real estate value will take a hit well after this crisis ends.
Given SmartCentres houses a tonne of resilient tenants, many of which are deemed as providers of essential goods and services, SmartCentres is a smart way to bet on a COVID-19 recovery without running the risk of losing one’s shirt should we be in for further waves of COVID-19 outbreaks.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette owns shares of Smart REIT. The Motley Fool recommends Smart REIT.